2. Workshop on Climate Change Issues jointly organized by KEMCO, NREL and CONAE 1 st December, 2003, Milan, Italy Role of ESCOs in reducing GHG emission in Korea Gyung-Ae Ha Center for Climate Change Mitigation Projects Korea Energy Management Corporation (KEMCO)

3. Korea Energy Management Corporation 1. Why ESCO for GHG reduction? 2. Background information - Korea 3. ESCO activities in Korea 4. Barriers

4. Korea Energy Management Corporation Why ESCO for GHG reduction?

5. Korea Energy Management Corporation ESCO  Energy Service Company  Market-oriented mechanism to improve energy efficiency  Important measure for mitigation of global climate change and implementation of the Kyoto mechanism  In Japan, reduce final energy consumption 1million kL-oil equivalent by ESCO activities (2010)  In Finland, reduce GHG emission about 8-13% of total emission reduction potential by ESCO  In Korea, have reduced 325,125 tons of oil equivalent (toe) per year since 1993

6. Korea Energy Management Corporation Potential role of ESCO under UNFCCC  Window of technology transfer  Credit producer from its energy saving projects  Potential key player in emission trading market  Specialized company for reducing GHG emission

7. Korea Energy Management Corporation Background Information - Korea

8.  Non-Annex I country and rapidly developing economy, highly dependent on imported energy  97.1%(in 2002), 31.2billion USD  more than 80% of GHG is CO 2 from fossil fuel combustion  Industry energy use is the main factor Background Information - Korea

9. Korea Energy Management Corporation Background Information - Korea  CO 2 emission (2001) - Energy sector : 83.5%  CO 2 emission from energy combustion

10. Korea Energy Management Corporation  Primary Energy Demand in Korea(Mtoe) Background Information - Korea 1971200020102030 Coal8425879 Oil11104126165 Gas-173361 Nuclear-284565 Hydro0001 Other renewables-237 Total primary energy demand 17194264378 Reference: IEA, 2002, World Energy Outlook 2002:Korea Energy Outlook

11. Korea Energy Management Corporation  Governmental effort to encourage energy conservation and higher energy efficiency  Rational Energy Utilization Act, 1979  KEMCO, 1980  New & Renewable Energy Development Act, 1987  Integrated Energy Supply Act, 1991 Background Information - Korea

12. Korea Energy Management Corporation ESCO activities in Korea

13. Korea Energy Management Corporation ESCO in Korea  ESCO business were formed based on the 1991 “Rational Energy Utilization Act” in Korea  Korean government provides low interest loans for ESCO since 1993 and tax credits for energy users  After 3 companies started in 1992, the number of registered companies grew to 163 companies in 2003

14. Korea Energy Management Corporation Tax recycling to fund ESCO projects Return profits Tax revenues according to price adjustment Energy End User Energy Saving Project Special Account

15. Korea Energy Management Corporation ESCO in Korea

16. Korea Energy Management Corporation Energy savings by ESCO activities

17. Korea Energy Management Corporation Financing Mechanism KEMCO Bank User ESCO Repay the loan Repay the loan for a maximum of 10 years Furnish the loan Pay energy savings Install the project Provide the loan

18. Korea Energy Management Corporation Repayment period for ESCO loans Repayment period: Pay interest & principle 1 st year5 th year10 th year Grace period: Pay interest

19. Korea Energy Management Corporation Barriers

20. Korea Energy Management Corporation Barriers  High debt ratio of Korean ESCOs  Average debt ratio in manufacturing industry and ESCOs in Korea 199920002001 Average debt ratio in manufacturing industry 214.7%210.6%182.2% Average debt ratio of ESCOs 368.5% 277.4% 368.6% Source: J. S. Kim, October 2002, “Research on ESCO guaranteed performance contacting,” Kyoungwon University.

21. Korea Energy Management Corporation Financing Mechanism - Factoring KEMCO Bank User ESCO Sell payment stream Pay energy savings Repay the loan for a maximum of 10 years Furnish the loan Install the project Provide the loan

22. Korea Energy Management Corporation ESCO factoring trends, 1999 to 2002 1999200020012002Total Amount used for ESCO projects (A) 49.8565.8557.77107.69281.04 Factoring (B) 15.968.9918.6159.30102.86 Ratio (B/A) 32.013.632.255.136.6 (unit: million US$)

23. Korea Energy Management Corporation Factoring by financial institution, 1999 to 2002 1999200020012002Total Non-bank financial institution KDB Capital 0.565.3711.4441.6559.02 (57.4%) Samsung Card 12.41--- (12.1%) Yonhap Capital 2.993.617.170.2314.00 (13.6%) Subtotal 15.968.9818.6141.8885.43 (83.1%) Bank Shinhan Bank ---17.42 (16.9%) Total15.968.9818.6159.30 102.85 (100%)

24. Korea Energy Management Corporation Barriers of factoring  The average duration of a typical ESCO project  Risks related to guaranteed energy savings by ESCOs  The size of the projects

25. Korea Energy Management Corporation  Need for compiling the projects  Need for establishing a financial institution specialized in ESCO Project  Understand nature of ESCO projects  Has an ability to manage risk and CO2 credits SOULTION

26. Korea Energy Management Corporation Thank you FOR MORE INFO... Visit KEMCO exhibition/ COP9, Fiera Milano send e-mail to hga@kemco.or.kr